The intent of this paper is to analyze whether foreign direct investing, FDI, has any impact on economic growing in Mexico. In order to happen a possible connexion I use a multiple arrested development analysis with GDP per capita as dependent variable. Furthermore, I critically examine old surveies of FDI and its consequence on GDP per capita in Mexico every bit good as other surveies with several developed and developing states. The difference between this paper and old surveies is that the information is more up-to-date here. My consequences, like most of the old surveies, do non bespeak on any statistical significance that FDI has a positive consequence on economic growing. FDI do nevertheless look to bring forth positive spillover effects on the domestic economic system, chiefly through cognition and technological spillovers.
Keywords: Foreign direct investing, spillover consequence, economic growing, endogenous growing, Mexico
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DI – Domestic Investing
FDI – Foreign Direct Investment
FIAS – Foreign Investment Advisory Service
GDP – Gross Domestic Product
HFDI – Horizontal Foreign Direct Investment
IDP – Investing Development Path
IFC – International Finance Corporation
IMF – The International Monetary Fund
MNE – Multinational Enterprise
NAFTA – North American Free Trade Agreement
OECD – The Organization for Economic Cooperation and Development
UNCTAD – The United Nations Conference on Trade and Development
VFDI – Vertical Foreign Direct Investment
The foreign direct investing ( FDI ) flows has increased dramatically since the last decennary. The one-year mean inward flows of FDI across the universe during 1990-2000 was 492 605 million US dollars. The size of FDI has increased every twelvemonth during this decennary and was every bit big as 1 833 324 million US dollars in 2007. However, the FDI is spread unevenly across the universe. The obvious action for transnational endeavors ( MNEs ) would be to put more in parts with low labor costs and big supplies of natural resources. This is non the instance though as the developing economic systems merely received 499 747 million US dollars from FDI in 2007 ( UNCTAD, 2008 ) . Although a big part of the FDI flows has been directed towards developed states, the developing states portion has increased significantly during the last decennary. The victors here are Latin America and Asia while Africa merely receives moderate sums of FDI. In Latin America it is Argentina, Brazil, Chile and Mexico that receive the largest sum of FDI ( Ramirez, 2000 ) . Mexico is no exclusion when it comes to the addition in FDI inward flows. The one-year mean inward flows of FDI was 9 368 million US dollars during 1990-2000. The addition in FDI gave an inward flow of 24 686 million US dollars in 2007 ( UNCTAD, 2008 ) .
Many surveies on whether or non FDI affect economic growing have been done through the old ages. These surveies all come to varied decisions. Some find that FDI so affect the economic growing while others find no such connexion. The earlier surveies focus on state instance surveies and industry degree cross sectional surveies. Overall, they find that there is a positive correlativity between mean value added per worker and the productiveness of a MNE. Later surveies gave up on state instance surveies and alternatively shifted the focal point to tauten degree panel informations. Typical for these surveies is that the bulk find no consequence from FDI on economic growing. Furthermore they find negative spillover effects from MNEs in developing states while positive spillover effects merely are found in developed states. Since older surveies are found unequal, more recent surveies have adopted another attack. These argue that spillovers should be thought of as exchanges between different industries which mean that focal point should switch to perpendicular ( inter-industry ) externalities. This refers to the contacts established between domestic providers and the foreign houses ( Alfaro et al, 2006 ) .
The intent of this paper is to analyze possible effects on the economic growing in Mexico from FDI. In order to accomplish this we shall carry on arrested development analyses with informations on FDI and GDP per capita in Mexico during the period 1993-2007. Furthermore we shall analyze earlier surveies that deal with FDI and its consequence on economic growing in Mexico every bit good as in general. My ain consequences will be interesting in the manner that the information is really recent. We will hence be able to see if any alterations have occurred during the last old ages, compared to earlier surveies. It is a fact that the consequences vary much among the old surveies. Therefore recent surveies have put focal point on explicating why this is the instance. We will analyze some of these consequences in this paper since they are relevant to my ain consequences. In this paper FDI will be expressed in 1000000s of US dollars and the economic growing as GDP growing per capita. GDP per capita has endured a batch of unfavorable judgment for non including effects on the environment and distribution of income. However, it is the step most normally used and that is why we shall utilize it every bit good.
The staying portion of this thesis is structured as the followers: Section 2 nowadays ‘s available theories on FDI and its consequence on the economic system. It besides contains information on growing theoretical accounts and the theoretical impact from FDI. Finally economic information refering Mexico is presented. Section 3 nowadays ‘s my ain consequence and compares it with earlier surveies. Section 4 contains readings and a treatment of the consequences. Finally subdivision 5 summarizes the paper.
2. Theoretical model
There are two signifiers of foreign investing. The first is when foreign investors purchase bets in a domestic endeavor, an indirect investing or foreign portfolio investing as it is known. The other is FDI and it is when a foreign proprietor finance the endeavor but is besides straight involved in the direction of the endeavor. The International Monetary Fund ( IMF ) defines the portion to be 10 per centum or more of the equity of the endeavor by the proprietor. This includes eventual loans from the foreign proprietor to the local company ( IFC and FIAS, 1997 ) .
In most documents FDI is merely mentioned as a certain degree of inward or outward flow to or from a state. FDI can nevertheless be narrowed down to perpendicular and horizontal FDI. Vertical FDI ( VFDI ) aims at efficiency seeking while horizontal FDI ( HFDI ) aims at market seeking. HFDI emerges when MNEs seeks to cut costs that arises with exporting their goods. By set uping the production closer to the client, costs associated with transit and trade barriers are avoided. HFDI is believed to hold a greater impact on spillover effects due to its intense usage of cognition while VFDI is believed to impact the local labor demand to a greater extent. To this day of the month, there are largely theoretical documents available about HFDI and VFDI and barely any empirical surveies. This is the instance due to troubles associated with separating HFDI and VFDI in FDI informations ( Beugelsidjk et al, 2008 ) . The FDI can besides be divided into greenfield and brownfield FDI. The difference between the two is that MNEs construct new mills, invest in distribution or research in the host state with greenfield FDI whereas brownfield FDI acquires mills that already exists in the host state. Therefore, greenfield FDI base for the largest influx of physical capital between the two types ( Johnson, 2005 ) .
Like IMF the Organization for Economic Cooperation and Development ( OECD ) proclaim that 10 per centum ownership give the foreign proprietor an “effective voice” in the company. However, if 10 per centum is non plenty to guarantee an effectual voice, it should non number as FDI harmonizing to OECD. Conversely, if the proprietor ‘s portion is less than 10 per centum and the proprietor still has direction control in the company, it will number as FDI. Since there are different sentiments of how to cipher FDI, OECD has formulated four constituents that should be included when ciphering the flows. These are maintained net incomes, equity capital, intra-company loans and intra-company adoption ( Jones and Wren, 2006 ) .
These definitions make it possible to compare FDI flows between states. There are several troubles when ciphering FDI though. The ground for this is due to different ordinances and Torahs between states when mensurating constituents of FDI ( Jones and Wren, 2006 ) .
The most of import factor for FDI is MNEs. The formal definition of MNEs by OECD is “companies or other entities established in more than one state, and so linked that they may organize their operations in assorted ways” . Some argue that MNE activity is the same as FDI. Those who are against this premise point out that this is non a perfect step of MNE activity. A house will merely put in a foreign state if the investing fulfills three conditions. First of wholly, the house must hold an advantage over the domestic houses, an ownerspecific plus. Then an advantage must be in the setting-up production alternatively of trusting on exports. The 3rd status is that the house must internalise its assets ( Jones and Wren, 2006 ) .
FDI is a beginning for financing a domestic house. It is non in itself the house nor its assets. A common misunderstanding is that many benefits generated by the domestic house are attributed to FDI. The house can borrow money from domestic Bankss or use new engineerings from their foreign proprietors, but this is non FDI. Should the foreign proprietor purchase out the equity place of the domestic proprietor nevertheless, this would be considered FDI ( de Macedo and Iglesias, 2001 ) . Something that is non discussed much in the literature on FDI is the development of the domestic cultural environment. It is slightly frowned upon by writers of the topic but however an of import factor for MNEs. Those MNEs that do take advantage of these differences and work it to their addition acquire a competitory advantage compared to those that refrain from it ( Hosseini, 2005 ) .
The impact of FDI on economic growing in a state depends on the grade of development. The investing development way ( IDP ) suggests five phases that a state goes through and which affect the degree of investing. During the first phase a state is considered to be about unable to pull inward direct investing. This is the instance due to low per capita income, developing economic systems and governmental policies, hapless substructure and communicating, and above all, a labour force with low human capital. The few direct investings made are chiefly in the labor-intensive fabrication and primary sector like agribusiness. In the 2nd phase, inward direct investing starts to lift. The investings are still largely located in natural resources and primary trade goods. In this phase, the host authorities is get downing to alter policies in order to excite FDI. The domestic houses begin to travel their production towards semi-skilled and knowledge-intensive consumer goods. The 3rd phase is characterized by lifting domestic income which causes an addition in demand for high quality goods, partially enhanced by an increased degree of competition among houses. The lifting incomes cause a lessening in growing of inward direct investing and an addition in the growing of outward direct investing towards states with lower degrees of IDP. The competition between domestic and foreign houses increases every bit good when the domestic houses get competitory advantages. The hypertrophied market and increased invention will enable economic systems of graduated table and promote technology-intensive fabrication. When the stock of outward direct investing exceeds the stock of inward direct investing, the state has reached the 4th degree. The domestic houses can merely vie with foreign houses in sectors where they have a competitory advantage. Alternatively they invest abroad in markets where the labor is cheaper. In the domestic market the capital-intensive production additions in bend. The 5th phase characterizes by a uninterrupted addition in outward and inward direct investing. This is the phase where advanced industrial states find themselves. The importance of MNEs is clear here. The domestic supply of natural resources is of less importance and alternatively the ability to work markets in other states is important ( Dunning and Narula, 1996 ) .
2.1.1 Positive effects from FDI
We have antecedently mentioned that MNEs base for the largest portion of FDI. In comparing to a domestic house it is presumed to hold more skilled labor and better entree to progress engineering which in bend gives a greater end product than the smaller houses. The obvious positive effects from FDI are a lessening in unemployment and an addition in investing and end product. There are besides other positive effects on the domestic economic system from positive outwardnesss, known as spillovers. Jones and Wren ( 2006 ) show four transmittal mechanisms that identify a spillover: “the motion of labor between MNEs and autochthonal workss ; purchase and supply linkages between MNEs and domestic houses ; imitation of MNE-specific engineering by domestic houses ; and competition effects that force domestic houses to go more efficient” . The first type is productiveness spillover which increases the productiveness of domestic houses. The 2nd one is market-access spillover which makes it possible for domestic houses to utilize export markets and distribution webs for their ain addition. When a MNE establishes in a foreign market it is possible for domestic houses to larn straight from them through linkages. A forward linkage enables the domestic house to utilize another firm’s end product for its input and the other manner around for a backward linkage. The domestic house can besides gain from motion of labor. The worker has frequently acquired cognition and specific competency from the MNE which benefits the domestic house. Both of these mechanisms make it possible for productiveness and market-access spillovers. Besides these effects MNEs besides better the grade of engineering and competition in the domestic market. Domestic houses frequently imitate MNEs usage of engineering to increase their productiveness, something which is known as “demonstration effect” . This is an indirect technological transportation. A direct transportation of engineering occurs when a MNE passes information to its local providers or when it licenses the engineering to a domestic house. The addition in competition forces the domestic houses to better the efficiency of their production techniques. Those that do non accommodate are forced out of the market. FDI besides improves the connexion between houses and establishments and better the market diverseness in many instances. There is however a danger involved with big spreads in productiveness between MNEs and domestic houses harmonizing to Glass and Saggi ( 1998 ) . A big spread in technological cognition might bespeak that there is a big possible catch-up consequence. If the spread is excessively big though, the instance may alternatively be that the domestic economic system does non hold the capacity to absorb the engineering. To low degrees of human capital and substructure makes it impossible to larn and utilize higher degrees of engineering. A 5th mechanism is proposed by Crespo and Fontoura ( 2006 ) and that is exports. MNEs normally have a positive consequence on distribution webs, substructure etc which in bend addition the export capacity of domestic houses.
The consequence of the positive spillover depends on how good the host state can absorb it, the absorbent capacity hypothesis. If the state has a low degree of engineering and human capital, it will non be able to get and utilize the cognition that MNEs produce. This is normally accepted as a fact and explains why developed states receive more positive spillovers from FDI than developing states. A big technological spread should so be negative for absorbing the positive spillovers. However, in recent empirical surveies, grounds has been found that this may non be the instance. Here, economic systems with a big spread in the technological degree between domestic houses and foreign houses are the 1s that get the most consequence from positive spillovers. The most plausible account here is that the domestic economic system addition structural and policy alterations in order to pull FDI and to be able to absorb the positive spillovers that come along with it ( Jordaan, 2005 ) .
Furthermore, spillovers can be voluntary or nonvoluntary. They are voluntary when a MNE interacts with a domestic house and a positive spillover is taking topographic point. The domestic house may so increase its quality of labor etc which is good for the MNE every bit good. With an nonvoluntary spillover on the other manus the domestic house applies the engineering that the MNE is utilizing, frequently by imitation or hiring experient workers from the MNE. Thereby the competition spread decreases to the advantage of the domestic house ( Johnson, 2005 ) .
Obviously the size of the benefits from FDI on a state ‘s economic system depends on several factors. One of these is the export-rate of domestic houses. Firms that are more exportoriented have adapted to foreign competition and are hence better prepared to absorb the positive spillovers generated by MNEs. The smaller the house is, the harder it is to copy the production form of the MNE due to its big production graduated table. Another of import factor that has late gained in importance is the regional consequence. This implies that the further off the beginning for the FDI is, the lesser consequence it has on the domestic economic system. The ground for this is lifting conveyance costs and limited labor turnover among other things. One of the most discussed factors is the absorbent capacity of domestic houses antecedently mentioned. The domestic house must possess basic technological and cognition accomplishment in order to absorb new accomplishments generated from FDI. This thought can besides be applied at the macroeconomic degree. MNEs tend to put more in advanced engineering in states with a certain degree of cognition and human capital. These are all factor that has been examined and discussed exhaustively. The undermentioned factors are slightly less discussed though. One is the notionthat FDI generates different spillover effects depending on the beginning state. Here civilization, linguistic communication, Torahs, transportation distance and constructions of FDI is of importance. The more similar thecountries are, the better the opportunity for a larger consequence from the spillovers ( Crespo andFontoura, 2006 ) .
2.1.2 Negative effects of FDI
As mentioned before, FDI might hold positive effects on the degree of employment on the domestic market. The degree of employment does non hold to lift though. If the MNE is capital intensive and forces domestic houses out of the market due to competition, the rate of unemployment might really lift alternatively. When MNEs invests in a new part they tend to put the rewards above the domestic houses in order to pull the most competent workers of the labour force. This in bend forces the domestic houses to raise their rewards in order to maintain their workers. A high addition of the rewards might hold negative effects on the economic system though. Some fear that MNEs merely invest in sectors with low-skill production and low-wage occupations. These investings tend to concentrate on bring forthing at a low cost and do non bring forth any investing in research and development. The impression on whether or non this is the instance goes apart. Another deduction of FDI on the degree of employment is that MNE houses are “footloose” . It means that if the production turns out to be less dearly-won in another state, it is easier for a MNE to travel the production to that state than for a domestic house to relocate their production. This may do instability to the regional economic system in the state.
During a recession, it is peculiarly harmful for the part if the foreign houses shut down, which are merely what they might to make on these occasions. Empirical grounds indicates that foreign houses exit the market one-and-a-half times more frequently than domestic houses. Furthermore, FDI may diminish the variegation of houses in a market. Agglomeration in a part tends to increase the mean hazard for the economic system and population in instance of a closure ( Jones and Wren, 2006 ) .
Other negative effects arise from a market stealing consequence. It means that foreign houses enter the domestic market and take over portion of the market which causes domestic houses to go out the market as a consequence ( Jordaan, 2005 ) . There are those who believe that domestic investings are better for the local economic system since domestic houses are supposed to hold better cognition and entree to domestic markets. The grounds from the positive spillovers by MNEs and their FDI goes against this given though ( Borensztein et al, 1998 ) .
A job with FDI in developing states is that it is argued merely to be a transportation of assets.
When foreign houses conduct amalgamations and acquisitions of domestic houses it does non automatically take to an addition in the capital stock. Since developing states tend to be capital-scarce, an addition in the capital stock is of great importance for future economic growing. If capital accretion takes topographic point as a positive consequence from FDI, it is required that the FDI does non herd out investing from domestic beginnings in order for economic growing to increase ( Herzer et al, 2008 ) . A job with the usage of spillovers arises when the MNEs export their merchandises. The domestic house is normally a manufacturer for the domestic market, which implies that the production procedure is non the same between the two. This in bend makes it hard for the domestic house to copy the MNE and its production procedure and thereby deriving positive spillovers ( Crespo and Fontoura, 2006 ) .
2.2 Economic growing
Economic growing within a state can be derived from several growing theoretical accounts. The best known growing theoretical account is the Solow-Swan theoretical account which was formulated in 1956. In this theoretical account, production is generated through capital and labor under the premise of changeless returns to scale. This is a neoclassical growing theoretical account and it explains growing partly by exogenic betterments in engineering ( Gylfason, 1999 ) . The consequence from FDI on growing in this theoretical account in the medium and long tally depends on additions in the volume of investing or its efficiency degree ( Nair-Reichert and Weinhold, 2001 ) . Domestic investing ( DI ) plays an of import function in neo-classical growing theoretical accounts where it enhances production growing and technological advancement. FDI is besides an investing but differs from DI. First of all FDI increases the technological innovations and particularly general intent engineerings. These inventions are discoveries which all states can follow, but at different gait. The 2nd difference is that FDI include more advanced technological facets. These advantages transfer to domestic houses in due clip, increasing the degree of end product ( Yao and Wei, 2007 ) . A theoretical account that explains growing endogenously was developed during the 1980s and 1990s. It was the endogenous growing theoretical account or as it is besides known as, the new growing theoretical account ( Gylfason, 1999 ) . When sing the different theoretical accounts and the consequence from FDI, the consequence differs. FDI increases the volume of investing in an economic system and may increase its efficiency in a neoclassical growing theoretical account. In the endogenous growing theoretical account FDI can increase the economic growing chiefly through engineering transportation and the antecedently mentioned spillover effects ( Nair-Reichert and Weinhold, 2001 ) . Since the technological advancement in the neoclassical growing theoretical account is determined exogenously, the theoretical account fails to explicate growing or the technological alteration itself satisfactory. Therefore we shall concentrate on the endogenous growing theoretical account.
In neoclassical growing theoretical accounts, FDI merely has a short-term growing consequence. In endogenous growing theoretical accounts on the other manus, FDI is believed to hold a greater impact on economic growing than domestic investings. The production map in the receiving state incorporates the technological progresss from FDI and thereby additions growing. These technological spillovers make it possible for a long-turn growing to take topographic point by antagonizing the effects of decreasing returns to capital. Beside capital accretion, cognition spillovers from FDI can besides heighten the economic growing. This takes topographic point when alternate direction patterns and organisational alterations occur alongside an addition in cognition stock through skill attainment and labour preparation. The accretion of capital through FDI generates positive spillover which enhances economic growing. Due to this, we can non merely analyze flow variables in order to understand the connexion between FDI and economic growing ( Herzer et al, 2008 ) .
One of the first endogenous growing theoretical accounts was constructed by Marvin Frankel ( Carlin and Soskice, 2006 ) . By get downing with a Cobb-Douglas production map his purpose was to retain desirable belongingss of the neoclassical production maps, but non the restrictions:
( 2.1 )
Where is end product for each house, _is the aggregative capital, A is the result of aggregative capital accretion in the economic system and __is labor. The difference from the Solow-Swan theoretical account is that A is non an exogenic productiveness factor. Labour enables knowledge in the production map which increases labour productiveness, besides known as “learning by doing” . This phenomenon occurs due to the accretion of capital. It is assumed that each firm’s cognition is a public good which gives an look for cognition in the whole market:
( 2.2 )
Where is a positive invariable. The production map for all the houses on the market when taking A as given is:
( 2.3 )
Since A is changeless for the house, there are decreasing returns to capital and changeless returns to scale. There are increasing returns to scale for the economic system. If the cognition spillover from capital accretion, is 1, so returns to aggregate capital accretion are changeless:
( 2.4 )
What is interesting with this production map is that the economic system grows at a rate independent of the savings/investment rate if _ & lt ; 1, but unlike the Solow-Swan theoretical account, its end product per capita does turn. This is obvious if we take the production map and so use logs and differentiate with regard to clip:
( 2.5 )
Along a balanced growing way. This in bend gives us:
( 2.6 )
Since the growing rate of end product per capita is in steady province, so which gives us:
( 2.7 )
Since technological advancement is endogenous it is the lone cause for growing of per capita end product. Beside technological advancement and its impact on economic growing, we encountered 15 other spillover effects from FDI. One of these is the accretion of human capital. The growing rate for human capital in an economic system is:
( 2.8 )
Where is the growing of human capital, is the alteration of human capital, “is the sum of human capital per person” , “is a grading parameter” and “the fraction of labour hours spent in instruction in order to larn new accomplishments that can be used in production” . Human capital is besides present in the equation for the growing rate for capital per worker:
( 2.9 )
If steady province exists when capital per worker grows at a changeless rate, so the ratio + /has to be changeless. The premise of changeless returns to human capital accretion needs to be held in order for the endogenous growing to emerge. The spillovers from human capital accretion are of import for the productiveness and are sometimes referred to as “social capital” . This is non merely the impression of sharing information and inventions but besides of reciprocality and behavior ( Carlin and Soskice, 2006 ) . Some of the theoretical accounts consider domestic investings to be of small importance for economic growing. Direct investings from other states are slightly different though. Due to the spillovers from FDI, they may hold a positive consequence on economic growing ( Gylfason, 1999 ) . It is normally believed that developing states can hold a high growing rate due to the catch-up consequence. Since their technological degree is much lower than developed states they can implement already available engineering and thereby increasing the growing rate. In order for the state to absorb the new engineering, a certain degree of human capital is necessary. Since MNEs are the largest subscriber of new engineering, their presence in a state may be of import for the economic growing. A big sum of FDI may do positive spillovers which in bend enables for the state to raise the growing rate ( Borensztein et al, 1998 ) .
Mexico has received FDI for several decennaries. Up until the mid-1940s the state could barely pull any FDI and was hence considered a stage-one-country in the IDP. From the 1950s to the 1970s the direct investing increased continuously. The metal-mechanical and the chemical industries were where most of the investings ended up. The basic substructure and the human capital were upgraded and the domestic market increased in size. This made it attractive for MNEs to put in the state. Although Mexico has big domestic houses and increasing outward direct investing, the state has non reached the 3rd phase. The debt crisis in the 1980s and the fiscal crisis in 1994 have left them in the 2nd phase, good advanced though. Today, Mexico relies more on FDI than on the domestic manufacturers in order to overhaul the industry. 1994 was non merely a twelvemonth of crises. Mexico besides became a member of the OECD and was approved for the North American Free Trade Agreement ( NAFTA ) . Mexican exports grow invariably and it is particularly positive that the exports are instead diversified. Mexico ‘s forward development has resulted in one of the most unfastened economic systems in the universe. The mean duty in modern clip is merely approximately 10 per centum ( Dunning and Narula, 1996 ) . The ground why the FDI increased so much after the fiscal crisis in 1994 is that Mexico implemented macroeconomic stabilisation steps every bit good as several reform plans. All these steps together with an attractive investing policy increase the FDI into the state. Harmonizing to Ramirez ( 2000 ) FDI inflows history for more than 15 per centum of the gross fixed capital formation.
Since Mexico has received FDI for a really long clip, the state has learned to manage these flows in a good manner. The authorities has changed its policies during these old ages in order to be able to direct the FDI. The authorities is now able to direct these investings to precedence sectors that exhibit high production capacity, better the substructure and utilize new engineerings ( Ramirez, 2000 ) . However, the influxs of FDI are non equally dispersed across the USD GDP per capita.
Mexican provinces. Alternatively most of the investings are placed in provinces surrounding the United States. The United States is the biggest subscriber of FDI to Mexico with over 60 per centum of the entire foreign investing in the universe. The huge bulk of FDI to Mexico originates from developed states, with over 95 per centum from the OECD.1 The development states are barely considered due to the low investings from them. The chief portion of the FDI in Mexico goes into the fabrication and services sectors.2 When turning to agribusiness and excavation, these sectors receive negligible portions of the investing from other states ( Jensen and Rosas, 2007 ) .
Mexico is the state in Latin America that receives most of the private foreign capital influx, about 50 per centum. The chief ground why the state receives such a big portion is foremost of all because that they are located following to the United States. Mexico is besides instead unfastened and is bettering the possibilities for foreign investing ( Dunning and Narula, 1996 ) . There is empirical grounds that for Mexico and other developing states the rates of return to capital are high. It is besides the instance that the degree of FDI is non higher in developing states than in industrialised states. So even though FDI has increased dramatically in Mexico during the last two decennaries, the degree of FDI is still higher in more developed states ( Banerjee and Duflo, 2005 ) . The following subdivision nowadayss my ain consequences every bit good as old surveies and their consequences.
3. Datas and statistical analysis
Several surveies have been made on FDI and its impact on economic growing. Some of these surveies concern Mexico entirely but most include several states. One difference between these surveies and my ain is that mine includes informations up to twelvemonth 2007, which makes it more up-to-date than the old surveies. Many of the old surveies do non happen that FDI have any important consequence on economic growing.
The measuring of inward FDI flows in Mexico gives somewhat different consequences from different beginnings. Therefore we use two beginnings for the informations on FDI. This information has been calculated by the OECD and the UNCTAD. The information differs slightly which indicate on different methods of measuring. When comparing the information to the domestic measuring ( Secretaria de Economia, Mexico ) the information from UNCTAD differ the least. 3 Nevertheless we shall execute two arrested development analyses, one with informations on FDI from OECD and one with informations on FDI from UNCTAD. This manner we will happen possible differences between the two informations sets. The first variable, the dependant variable, is Ln ( GDP ) per capita. As independent variables we use Ln ( FDI ) and the lagged variables Ln ( GDP ) per capita the old twelvemonth and Ln ( FDI ) the old year.4 In order to accomplish this we shall utilize a dynamic accommodation theoretical account by Verbeek ( 2004 ) :
( 3.1 )
Where t-1 is the old twelvemonth. The ground why we compare with the old twelvemonth is because FDI might impact GDP per capita, non merely the present twelvemonth, but besides in the longer run. No dummy variables are used in the theoretical account in order to detect the difference from before and after NAFTA. The ground for this is that the information is chiefly from after Mexico joined NAFTA in 1994. Suppose that 1 _ 1 and 4 _ _ , so we have: Where t-1 is the old twelvemonth. The ground why we compare with the old twelvemonth is because FDI might impact GDP per capita, non merely the present twelvemonth, but besides in the longer run. No dummy variables are used in the theoretical account in order to detect the difference from before and after NAFTA. The ground for this is that the information is chiefly from after Mexico joined NAFTA in 1994. Suppose that 1 _ 1 and 4 _ _ , so we have:
( 3.2 )
Which is a difference-in-difference theoretical account. In this instance, _ ? % in GDP by a % addition in FDI. The long-term look of ( 3.1 ) is:
( 3.3 )
By utilizing the theoretical account ( 3.1 ) , we obtain the consequences as shown in Tables 2 and 3. By utilizing the theoretical account ( 3.1 ) , we obtain the consequences as shown in Tables 2 and 3.
- Arrested development Analysis: LnGDP t versus LnGDP t-1 ; LnFDI t UNCTAD ; LnFDI t-1 UNCTAD
- Arrested development Analysis: LnGDP t versus LnGDP t-1 ; LnFDI t OECD LnFDI t-1 OECD
95 per centum assurance intervals are used in the trials. The P-value of Ln ( FDIt ) in the first trial is 0,398 and 0,282 in the 2nd trial. The corresponding P-value for Ln ( FDIt-1 ) is 0,965 and 0,982. Obviously the consequence is non important at any conventional degree ( 95 % – 99 % ) and we can non reject coefficient degree Celsius or coefficient vitamin D in neither trial. Harmonizing to the trials, there is a difference between the two beginnings. However, both values are really high and hence we conclude that FDI does non hold any important consequence on economic growing in Mexico here. We have besides tested other theoretical account discrepancies, for illustration, without the lagged FDI term, and happen that the undistinguished consequence remains. Fig.3 and 4 show the correlativity between Ln ( GDP ) per capita and Ln ( FDI ) . Both figures, with informations from UNCTAD and OECD, display a positive correlativity.
- Arrested development Plot with informations from UNCTAD
- Arrested development Plot with informations from OECD
When looking at these arrested development secret plans, we could pull the decision that GDP per capita and FDI are correlated. Even though a positive correlativity might be, this does non intend that there is causality in the trial. The earlier sentiment was that an addition in FDI leads to an addition in economic growing. This is non the general belief today and there are those that claim that alternatively it is an addition in economic growing that causes an addition in FDI flows. There are a batch of statements on which is true and the sentiment differ. One account is specious arrested development. This is when the t-value suggests a important relationship between two variables when there in fact is no important relationship to be found ( Verbeek, 2004 ) . More about the causality between economic growing and FDI is presented in subdivision 3.2, comparing with old surveies.
3.2 Comparison with old surveies
The consequences on whether or non FDI is positive for economic growing differ between different surveies. One decision can be made when comparing these surveies and that is that it depends on if it is a microeconomic survey or a macroeconomic survey. The microeconomic surveies at the firm-level frequently end up with the consequence that FDI does non increase economic growing and does non bring forth positive spillover effects. No technological transportation from MNEs to domestic houses is taking topographic point harmonizing to this. When we look at the surveies with aggregative FDI flows for a wide cross subdivision of states that is at the macroeconomic degree the consequence is another. Here, FDI should hold a positive consequence on economic growing. Even though the macroeconomic surveies show a positive consequence from FDI, we must look at these surveies a spot sceptically. One ground is that they do non command for different country-specific effects. Another is the usage of lagged dependent variables such as regressors. This can do inaccurate coefficient criterion mistakes ( Carkovic and Levine, 2002 ) . In Carkovic and Levine ‘s ( 2002 ) survey they use a macroeconomic method that excludes many of the earlier macroeconomic jobs. Here they find that FDI is non independent in altering the economic growing. Even though FDI may do an addition in economic growing, other growing determiners and a developed fiscal market are necessary for the consequence to be effectual.
Waldkirch ( 2008 ) has studied the effects from FDI on the economic growing in Mexico after NAFTA was implemented in 1993. The consequence show that the degree of FDI has increased well since Mexico joined NAFTA. However, the investings are frequently placed in sectors with unskilled workers. One of the grounds with the paper was to see if FDI from more distant states had a larger consequence on assorted economic indexs in Mexico. The decision is that there is non adequate grounds for this given. Ramirez ( 2000 ) has besides studied informations on the impact of FDI flows on economic growing specifically for Mexico.
By and large the FDI in the state can be said to give big positive spillover effects and output strong international trade links. Furthermore, the econometric grounds indicates that the variables in the production map in the survey do non fluctuate much in relation to each other in the long tally. When utilizing Error Correction Models ( ECMs ) the writer happen a positive and statistically important consequence on the labour productiveness from the growing rate of private and foreign capital stock. One of import facet with FDI is the inquiry if the addition is larger than the negative side-effects. Even though positive spillovers will happen, there are besides costs for Mexico such as subsidies and revenue enhancement grants. Another survey of FDI and the consequence of its spillover in Mexico have been made by Jordaan ( 2005 ) . He concludes that FDI do ensue in positive outwardnesss which are positive for the economic growing.
Furthermore, the FDI tend to concentrate on labor-intensive and low productiveness industries in the fabrication sector. He besides finds cogent evidence, contradictory to the theory, that the economic system is positively affected by agglomeration. These geographical concentrations of domestic and foreign houses increase positive outwardnesss through imitation, labour turnover and inter-firm linkages. Industries that are less agglomerative therefore receive less positive outwardnesss. In extremely agglomerative sectors Jordaan ( 2005 ) discovers, unlike old surveies, that houses with a big technological spread compared to foreign houses, are the 1s that gain the most on positive outwardnesss. He is of the sentiment that the absorbent possibilities of a house might non be as big an issue as believed earlier. The empirical grounds clearly indicates this.
Tuan and Fung-Yee ( 2007 ) besides find positive effects from FDI and agglomeration, but in China. The FDI is chiefly focused in the southern and eastern parts and is believed to lend to the sustained growing in the parts. A larger and more recent survey has been made by Alfaro et Al ( 2004 ) . They use more explanatory variables than the old survey, such as population growing, rising prices rate, authorities ingestion etc. They find that FDI affect the economic growing positively. For the positive effects to take topographic point though the local fiscal market has to be developed in the receiving state. A ill developed fiscal market can non do usage of neither short-run capital flows nor long-run stable flows. With this, they claim to hold proven that the nexus is causal between FDI and economic growing.
Furthermore they found that most states, including industrialised 1s, have particular policies with financial and fiscal inducements in order to pull FDI. In a ulterior survey by the same writers ( Alfaro et al, 2006 ) they use both microeconomic and macroeconomic empirical literature in order to get hearty consequences. They find that the growing rates appear to be about twice from FDI in a state with developed fiscal markets compared to states with ailing developed markets. They besides find larger growing effects when the domestic houses and MNEs produce replacements. Balasubramanyam et Al ( 1996 ) happen a statistically important consequence at the 1 per centum degree in their survey of 46 states, which are classified as developing. Since the survey focal point on trade, their consequence indicates that FDI accelerate economic growing faster in an economic system that promotes export.
Borensztein et Al ( 1998 ) use a big figure of explanatory variables in a cross-country arrested development model like the survey by Alfaro et Al ( 2004 ) . Their survey includes informations from 69 developing states that receive FDI. Although their consequence is non statistically important, they believe that FDI do hold positive effects on the economic growing of a receiving state. This positive consequence chiefly takes topographic point through betterments of the technological cognition. Like many other surveies they use human capital as an explanatory variable. Just like the rate of technological advancement, the rate of human capital is important for a country’s economic growing. A state with a low degree of human capital can non use the FDI that flow into its economic system. The writers conclude that a minimal threshold of human capital stock is required and that a higher degree of human capital enables a state to set the FDI to better usage, and thereby facilitates for economic growing.
As we observed in the theory, FDI can be divided into horizontal FDI ( HFDI ) and perpendicular FDI ( VFDI ) . Previous surveies have non made this of import differentiation though harmonizing to Beugelsidjk et Al ( 2008 ) . They test severally effects from HFDI and VFDI on economic growing by utilizing gross fixed investing stock, degree of schooling, black market premium and population growing as explanatory variables. When the sample includes both developed and developing states, the consequences indicate that neither HFDI nor VFDI affect the economic growing. When utilizing the traditional FDI variable though, the consequence is important. Still, this consequence changes when dividing the states into a sample of developed states and another sample of developing states. The sample with developed states now shows a positive and important consequence for both HDFI and VFDI. The sample with developing states on the other manus does non demo a important impact on economic growing from neither HDFI nor VFDI. There is still a positive consequence from traditional FDI on economic growing here every bit good as earlier. The consequence from the empirical research in the survey shows that HFDI has a 50 per centum larger impact on growing in developed states than VFDI. Even though HFDI and VFDI are of import for different types of development, it is clear that HFDI is more of import for economic growing. Herzer et Al ( 2008 ) survey 28 developing states and make non happen any grounds that FDI has a positive consequence on GDP for most of the states.
Perceptibly they can non happen a individual state with a positive long-run consequence from FDI on GDP. One statement from earlier surveies is that a positive consequence on the economic system in the domestic state comes from an addition in the demand for natural stuffs. Foreign houses that set up mills will necessitate natural stuff in order to bring forth their merchandises. Yet in this survey the writers find grounds that this might non be the instance. MNEs that use a batch of natural stuff in their production do non buy these from the local providers. Alternatively they tend to get them within the endeavor and thereby from foreign providers. The political state of affairs and governmental actions besides have a great impact and might explicate the divergences in some states harmonizing to Fung-Yee and Tuan ( 2006 ) in their individual state survey of China. Furthermore they conclude that FDI in countries with high agglomeration of specific sectors does non increase GDP every bit much as in more diversified countries. Alternatively local houses, particularly in the fabrication sector, seem to impact GDP straight to a greater extent than foreign houses. One of import likely consequence from FDI on economic growing is the cognition spillover as mentioned before.
Gorg and Greenaway ( 2004 ) nevertheless find grounds that this might be a 26 false premise. From a 25 firm-level surveies from both developed and developing states, merely 6 show positive effects from spillovers to the domestic houses. Some of these really show negative effects on the domestic houses as a consequence from FDI spillovers. One account for this is that foreign houses have lower fringy costs from firm-specific advantages. This competition forces domestic houses out of the market since they can non vie. Crespo and Fontoura ( 2006 ) present empirical grounds of the extent that the domestic houses are able to absorb them and happen that the consequence from positive spillovers appear to be greater in developed parts.
An of import facet we have to see is the causality between FDI and GDP. Barely any older surveies test for the causality. One causality trial that has been made is by Herzer et Al ( 2008 ) . They test for weak exogeneity and therefore for long-term Granger non-causality which was presented before. In order to acquire accurate consequences they do this “ ( I ) by utilizing several alternate methods for gauging the cointegrating parametric quantities ; ( two ) by utilizing other methods to prove for causality ; and ( three ) by including several control variables, such as labor, domestic investing, and export” ( Herzer et al, 2008 ) . The consequence indicates that merely four states show a long-term positive impact of FDI on GDP. However, the long-term causality is bidirectional which signify that FDI causes growing every bit good as it is a cause of it. Furthermore in the long tally merely one state is found to hold unidirectional influence from FDI on GDP. This unidirectional influence is negative though. The writers besides study the short tally and here they find that in five of the states FDI affect GDP positively while it affects GDP negatively in four states.
Therefore they come to the decision that FDI can non be proven to hold a positive impact on GDP in developing states since they are non able to happen any statistical important long-turn impact. Liu et Al ( 2002 ) besides find cogent evidence of bi-directional causality in the long tally from FDI on GDP in China. Beside FDI and economic growing they besides include exports and imports in their survey. Yet another survey on causality between economic growing and FDI has been made by Chakraborty and Nunnenkamp ( 2007 ) . They put informations from India to Granger causality trials but conclude that there is no causal relationship between the two. An interesting observation made nevertheless is that cross-section spillovers take topographic point from the service sector to the fabrication sector. FDI in the service sector therefore causes growing in the fabrication sector. 27 One ground why these surveies differ so much in the consequence could be that some assume heterogeneousness across states in the panel surveies while others assume homogeneousness harmonizing to Nair-Reichert and Weinhold ( 2001 ) .
Their survey of 25 developing states differs well from traditional panel informations causality consequences. They allow the strength of causality to change from state to state and license for heterogeneousness. They find that the relationship between FDI and economic growing is extremely heterogenous and that the consequence from FDI on economic growing is more efficient in unfastened economic systems. In Johnson ‘s ( 2005 ) survey of 90 developed and developing states the way of causality is from FDI to the economic growing. From cross-section and panel informations analyses the survey show that FDI do hold a positive consequence on the economic growing in the receiving state. What truly differ between this and the bulk of old surveies is that FDI seem to better the economic growing in developing but non in developed states. The consequence should be viewed critically though due to the little sample of developed states. In the 4th subdivision we will discourse my consequence and the consequences from old surveies.
The consequences presented in this paper indicate on different consequences from different surveies. How should we be able to get the right reply of the possible connexion between FDI and economic growing? In order to come to a decision there are several factors to be considered. We have to retrieve to critically analyse the methods these consequences are based on. All different surveies suffer from some kind of jobs which makes it possible to oppugn the consequence. A common method is cross-country surveies which frequently show that FDI has a positive impact on the economic growing. The greatest job here is the premise of indistinguishable production maps from the different states included in the survey. This may give a false consequence since the policies and production engineerings differ to a big extent between the states. For a correct survey to take topographic point, we would hold to take all these differences into history.
Furthermore, if the coefficient of FDI in the growing equation is statistically 28 important, this does non automatically bespeak a connexion between FDI and economic growing. In fact, “cross-country surveies may endure from serious endogeneity biases” and “unobserved heterogeneousness due to omitted variables may take to colored parametric quantity estimates” ( Herzer et al, 2008 ) . Since FDI is purportedly more effectual when the economic growing is high, a positive correlativity can be compatible with causality running from growing to FDI. Theoretically, the FDI should hold a positive consequence on economic growing harmonizing to the endogenous growing theoretical account, at least greater than domestic investing ( Herzer et al, 2008 ) . Another common method is panel surveies which eliminates the old job by utilizing unseen country-specific effects. This method makes it possible to command for endogeneity prejudice due to the usage of lagged explanatory variables ( Herzer et al, 2008 ) . By utilizing time-series and cross-section panel informations estimation the research worker can command for “countryspecific, time-invariant fixed effects and include dynamic, lagged dependent variables” ( Nair-Reichert and Weinhold, 2001 ) .
Of class, this method besides suffers from assorted jobs. One job is when the coefficients of the lagged dependant variables are homogeneousness imposed, even though the kineticss are heterogenous ( Herzer et al, 2008 ) . This can take to prejudices which subsequently on can non be corrected with instrumental variable appraisal ( Nair-Reichert and Weinhold, 2001 ) . Another job is that the relationship between FDI and GDP is restricted to growing rates or first differences which besides can bias the consequence. A degree relationship would be required in order to acquire right consequences ( Herzer et al, 2008 ) . Finally, many of the available surveies should be critically examined since merely system-based cointegration process is used to prove for cointegration between FDI and economic growing. This may take to a rejection of the consequence where the cointegration and the causality between FDI and GDP are presented ( Herzer et al, 2008 ) .
As concluded before, the consequence depends on if it is a microeconomic or macroeconomic survey. Furthermore, most surveies besides fail to see country-specific effects from FDI. However econometrically FDI should hold a positive consequence on economic growing. This can non be statistically proved harmonizing to my survey and several of the old surveies. Still, FDI do bring forth several positive spillovers. One of the most of import is technological spillovers 29 which domestic houses can accommodate. More surveies are required on this topic though since there are different sentiments whether a big technological spread between MNEs and domestic houses is positive or negative.
Of class, the technological spillover consequence is positive on the economic growing both with a little and a big technological spread. If FDI is to impact the economic growing positively, the effects from the positive spillovers must be larger than the negative spillovers. The authoritiess hankering for FDI might really harm the economic growing through big subsidies and revenue enhancement grants. We must besides cover with the causality issue. Merely one of these surveies ( Johnson, 2005 ) shows a positive causality, that FDI do consequence economic growing and non the other manner around. The other surveies that do prove for causality in the long tally merely happen cogent evidence for this for some of the states in the samples. The chief portion of the states show no or bi-directional causality between FDI and economic growing. An interesting idea is that FDI has no consequence on economic growing and that this is merely a belief among the states that try to pull it.
Alternatively, in their attempts to pull FDI, they enable for economic growing themselves through reforms and policies. Despite the fact that most surveies can non happen any statistic grounds that FDI do consequence economic growing positively in the long tally the writers are overall still positive towards FDI. They believe that FDI have a positive consequence on GDP per capita but that it is merely one factor among many others. The spillover consequence is an abstract construct and non straight mensurable. The empirical literature usage econometric analysis to see the consequence from spillover effects on economic growing. It is hence non easy to acquire accurate replies on this topic ( Crespo and Fontoura, 2007 ) . An interesting point to see is if it is at all realistic to see FDI to impact the economic growing in a state. If we look at Mexico, the sum of FDI has risen greatly since the 1980s.
Still, this is merely a marginal of the GDP. Can we therefore expect FDI to hold any kind of impact on the economic growing in Mexico? Since FDI merely is a fraction of a states entire investing, it is difficult to happen the grounds of to which extent FDI affect economic growth.Interestingly FDI may in fact be harmful for the regional economic system but positive for thenational economic system ( Jones and Wren, 2006 ) . The consequence from FDI on economic growing in Mexico can non seemingly, like for the other states, be statistically proven. The surveies do nevertheless demo an addition in labour productiveness and other positive spillovers. The influx of FDI is comparatively high in the state and a lifting degree of human capital and degree of cognition encourages the flow to go on and increase.
Since FDI influxs have existed for a long clip in Mexico the authorities has learned to manage it efficaciously through policies and establishments. Their fiscal market has besides been developed, something that is cardinal in order for FDI to impact GDP per capita efficaciously. Furthermore it is a known fact that FDI influxs in Mexico tend to increase the agglomeration of houses. Whether this is positive or negative for the economic growing is disputed though.
Finally, we must see the fact that even though we can non happen any statistical significance in our survey, it is merely the consequence for the information in our survey. Although the void hypothesis is rejected, this might non reflect the world. Our arrested development analysis did non happen any statistical significance when we used the variables in ( 3.1 ) and neither when we performed the trial without the lagged variables. It is of import to retrieve that other of import variables can be used and perchance give another consequence. An interesting variable here is domestic investing. Further research should be made refering domestic investing and the possible connexion to FDI. The concluding subdivision summarizes the paper and nowadayss my decision on whether or non FDI affect economic growing in Mexico.
Whether or non FDI has any consequence on economic growing is widely argued in both old and present surveies. Some come to the decision that FDI does hold a positive consequence on GDP growing per capita. Others can non happen any grounds that this is the instance. These different consequences depend on whether the writers have used microeconomic methods or macroeconomic methods but besides on different informations and different explanatory variables. 31 Herzer et Al ( 2008 ) take causality into history and trial for long-term Granger non-causality. Their consequence indicates that there are barely any states that show a long-term positive consequence from FDI on GDP per capita. Those states where FDI does hold a positive consequence on GDP growing per capita show a bi-directional causality, which means that FDI might every bit good do economic growing every bit good as it is a cause of it. Other surveies on causality from Liu et Al ( 2002 ) and Chakraborty and Nunnenkamp ( 2007 ) merely find cogent evidence of either bi-directional causality or no causal relationship at all.
In this paper, we use a dynamic accommodation theoretical account to analyze the dependance of Ln ( GDP ) per capita on Ln ( FDI ) . Furthermore we use more recent informations than old surveies, from 1993 to 2007 and from two different beginnings in order to see if the consequence differs. The multiple arrested development analysis indicates that the coefficient for Ln ( FDI ) and its lagged variable are non statistically important at the 5 per centum degree in neither of the trials. We besides perform an analysis without the lagged FDI term, but find that the undistinguished consequence remains. Even if my consequences and several other surveies show that FDI does non hold a positive consequence oneconomic growing, most writers argue that FDI may hold a positive consequence on GDP per capita at least in certain sectors. We can non merely analyze flow variables in order to understand the connexion between FDI and economic growing. Positive spillover effects from FDI are of import but the importance of state specific absorbent chances are disagreed upon. Available surveies fail to detect of import factors that might impact the economic growing, such as political and cultural differences. Future surveies should concentrate more on specific states in order to acquire more dependable consequences.
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